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After the aborted NanoDynamics IPO disaster in Dubai in February and six months of bleak IPO news in general, we have a new try at a nanotechnology IPO. On August 8, 2008 A123 Systems, Inc. (A123) of Watertown, Massachusetts filed a registration statement with the SEC.
August 15th, 2008
A123 Systems is IPO'ing
A123 Systems is IPO'ing
Alan B. Shalleck
July - August 2008
After the aborted NanoDynamics IPO disaster in Dubai in February and six months of bleak IPO news in general, we have a new try at a nanotechnology IPO. On August 8, 2008 A123 Systems, Inc. (A123) of Watertown, Massachusetts filed a registration statement with the SEC. Like NanoDynamics, A123 is one of the "Nano-Green" nanotech companies. (Remember the path to Green goes through the Nanotechnology space). A123 features proprietary (licensed from MIT) nanotech based battery technology and is the most commercially promising of the MIT nanotech spin-offs. The company is raising about $175 million by offering to sell between 8 - 10 million common shares (in this lousy market) at about $20/share. The A123 IPO underwriters are the stars of Wall Street … Morgan Stanley, Goldman Sachs, and Merrill Lynch. The IPO timing is designed to go effective right in the heart of the fall investment season (after everyone is back from vacation) for maximum buyer interest and to jolt the IPO market for non-bio high tech companies back into play over the last quarter of 2008.
Although, with these underwriters, A123 IPO will probably be a successful offering, the strategic issue remains: "Does a successful A123 IPO usher in a gusher of additional nanotech IPO's or is it just a unique situation as was NanoSphere last November?" I am not sure A123 is a harbinger of things to come. Maybe more nanobatery technology companies but not nanotech in general.
A123 is a "perfect storm" company - nanotech, global warming, energy storage, batteries, green, high fuel prices, pressure for electric and hybrid car energy storage improvements, electrical grid Storage and up dates needed, manufacture in China, etc.- all make A123 the right company in all the hot investible spaces. However, the company's unique positioning even if the IPO is oversubscribed will not signal that the Nanotech public market is open. Let us explore a little.
Like most Nanotech companies, A123 has not a profitable Income Statement. On the positive side, the company is selling commercialized nanotechnology in finished battery products to Black and Decker for B & D's portable tool offerings. Eighty per cent of A123 sales are to B & D and that the first indication that something unique may be happening at A123. The company generated about $41 million of revenue in 2007, but, typical of nanotech based companies, lost over $31 million for the 2007 fiscal year. Sales seem to be up about 25 % for 2008 but, in the prospectus, the company projects losses for the foreseeable future. IPO investors clearly will not be purchasing stock to ride a wave of near or medium term profits.
Moreover, from the "Red Herring" a significant (unspecified) portion of the funds raised is going to payout original investors. The offering therefore is the typical some needed funds going into the company for sustainability and growth and the rest are going to reward those who risked early. This IPO is a partial bailout and investors should realize that fact.
A123 has gone through about $266 million in raised funds the most recent of which was a private convertible offering of $102.1 million. Capital expenditures for 2008 are estimated at about $60 million as the company builds out its manufacturing facilities in China and in the Boston, MA areas. The IPO should provide adequate funding until early 2010 according to the prospectus. Clearly after the offering A123 will be very well funded with enough funding to manufacture for hybrid and all electric car needs as the major car manufacturers incorporate A123's newest, safest and more compact nano Lion (Lithium Ion) battery designs. With General Motors as an early investor, A123 seems to be uniquely well positioned in the transportation industry.
The three areas of commercial design programs for A123 are (from the prospectus):
In our largest target market, the transportation industry, we are currently working with major North American and European automotive manufacturers and major automotive, or tier 1, suppliers to develop batteries and battery systems for hybrid electric vehicles, or HEVs, plug-in hybrid electric vehicles, or PHEVs, and electric vehicles, or EVs.
The second target market is the electric grid services market. In this market, we are working with AES Energy Storage, LLC, a unit of AES Corporation, or AES, to develop multi-megawatt battery systems designed to offset sudden power shortages caused by generator or transmission outages and to help regulate the minute-to-minute frequency fluctuations in the grid that are caused by changes in supply and demand of electricity.
The third market is the portable power market, which includes power tools, home appliances and other high-power consumer electronics ... We first commercialized our battery technologies for use in cordless power tools.
These are all large commercial markets and A123 has a commercial head start in each one… plus secret government and military design and development contracts. Looks like a good mix of possibilities and strong positioning in near term growing markets.
The strategic problem for A123 is that all nanobattery R & D companies, and the auto manufacturers themselves, are racing to create unique designs with their own proprietary technologies in these same target markets and A123 will have to scramble to capture and sustain significant shares of these markets. Marketing, not technology alone, should win the day. Some of the funds raised by the IPO are designated for expanded marketing … maybe not enough.
A123 management's strategy has four legs and the four legs seem to make sense.
1. Focus on premium high quality batteries (for some pricing independence) with innovative nanotechnology based features and differentiated performance. (Avoiding commodity battery products)
2. Partner with Industry leaders - to commercialize our products and to meet specific requirements in the industry leader's markets. (Get them to invest in the company!)
3. Remain in the forefront of commercialization and innovation of new batteries and battery systems. Keep in the forefront of nanophosphate battery technology and to keep away from any toxic chemical component in A123 battery systems.
4. Reduce costs through manufacturing process design improvements and through optimization of the supply chain through innovation in materials and battery system design.
All the right words and intentions. It is not easy to sustain the legs in an expanding demand driven market environment.
That is A123 concisely. Clearly, the company has a good start and is focused on products and commercialization of new electrical storage devices. It has a pipeline into MIT and access to hot new technology. It will have enough funds to create a platform for profits after the IPO.
It is certainly good for the nanotechnology industry to have one of its most promising companies be recognized by these fine underwriters as a saleable IPO. Look at what is attractive in A123 all you nanoentrepreneurs and fill in the deficiencies in your own company so that you can follow in A123's footsteps and IPO yourselves.
Alan B. Shalleck
© NanoClarity LLC 2008